Gyongyi Loranth (University of Vienna)

“Multinational Banks and Supranational Supervision”

Abstract

We study the supervision of multinational banks (MNBs), allowing both for national and supranational supervisions. National supervision leads to insuffi cient monitoring of MNBs due to a coordination problem between supervisors. Supranational supervision solves this problem and generates more monitoring. However, this increased monitoring can have unintended consequences, as it also aff ects the choice of foreign representation. Supranational supervision encourages MNBs to expand abroad using branches rather than subsidiaries, resulting in more pressure on their domestic deposit insurance fund. In some cases it discourages foreign expansion at all, so that financial integration paradoxically decreases. Our framework has implications on the design of supervisory arrangements for MNBs, the European Single Supervisory Mechanism
being a prominent example.